The Ferrari Consulting and Research Group via its affiliated Supply Chain Matters blog shares a mid-year assessment of previously published 2022 predictions for industry supply chains published at the beginning of 2022. We especially take note of where there have been significant developments and noteworthy shifts in areas of predictions.
Our Ferrari Consulting and Research Group clients and Supply Chain Matters blog readers are likely well aware that each year we publish at the start of that year, a Research Advisory outlining our ten predictions for the coming year. Our 2022 Predictions for Industry and Global Supply Chain advisory remains available for complimentary downloading at our Research download site.
The basis of our 2022 predictions were our belief that the 2021 predictions theme of Renewal was shifting toward one of Reexamination of business process practices and decision-making needs. Our stated belief was that the multi-industry supply chain challenges of 2021 would not abate and would linger in some cases into 2023.
As the calendar now moves to the second half of 2022, it is important to focus on rapidly changing forces and developments including a marked escalation in geo-political tensions that impact global supply chain strategies.
Economic Outlook Significantly Changed
Our annual predictions advisory began with a summary of prevailing global economic, financial and manufacturing outlooks.
We cited The International Monetary Fund’s (IMF) World Economic Outlook report. The October 2021 report included a cautionary theme for 2022, specifically that: “Overall, the balance of risks for growth is tilted to the downside. Risks surround rising inflation, the duration of ongoing supply disruptions and the eventual path of the pandemic” The October report had forecasted global economic growth of 4.9 percent this year, after the global economy grew a reported 5.9 percent in 2021.
Since that time, the IMF along with the World Bank have been issuing revised downward forecasts. By early June, the World Bank trimmed its forecast for economic growth to 2.9 percent for this year, two percentage points lower, warning of the effects of high global wide inflation, the war in Ukraine and continued supply chain disruptions will impact real GDP growth..
Updated forecasts point to an “overlapping crisis” that factors the effects of the war in Ukraine, recurring Covid lockdowns and the highest inflation rates in decades. There was further warning of a considerable stagflation risk, a combination of weak economic growth with rather high levels of inflation. The president of the bank indicated: “several years of above-average inflation and below-average growth now seems likely.”
Global economists are now more focused on geo-political developments as well as the effects of the pandemic and high inflation as dampening prospects for economic growth. The likelihood of a full-blown recession impacting Europe by 2023 is now appears more cogent while prospects for growth of the U.S. economy in 2022 have been ratcheted down to just over 2 percent. This month, the Economist Intelligence Unit revised its forecast of the overall U.S. inflation rate to be 9.2 percent.
There is further growing evidence on the U.S. front that retailers and certain businesses may have procured too much inventory, and now that these inventories have arrived, the challenge will be not to exposed to a decline in consumer buying activity in the months to come. Reported research from Bloomberg Intelligence indicated that the retail industry is holding at least 20 percent more inventory than they have on average over the past three years. The implication is that without an increase in discretionary item sales, profitability levels for the industry will continue to erode.
According to a recent published report from the Economist, (Paid subscription required) companies are spending more to shield themselves from supply chain chaos tomorrow. Reportedly, the inventories of the largest 3,000 global firms, excluding real estate firms, increased inventory levels from 5.2 percent of GDP to 6.2 percent of GDP between the two years from 2019 to 2021. The effect has been cash and working capital headwinds and growing demands for warehouse space.
CFO Sentiment
In its Q4-2021 update, The CFO Survey, a collaboration of Duke University’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta indicated that the most pressing concerns among Chief Financial Officer’s (CFOs) entering this year centered around labor availability, cost pressures, inflation, and supply-chain disruption. Almost 90 percent of firms reporting at that time indicated larger-than-normal cost increases, reflecting a sharp rise from the second quarter of 2021.
The same CFO Survey reported for the end of June this year indicates that senior corporate financial manager views on the economy have worsened, coupled with reduced expectations for real GDP growth. Expectations of input cost growth have extended to a median value of 6 percent on an annual basis. Reportedly, unit cost increases are expected to moderate next year. Inflation-adjusted revenue growth is expected to stagnate while employment growth is expected to moderate for the typical firm. The most pressing concerns at the mid-year mark are similar to those at the start of the year, namely labor quality and availability, cost inflation and supply chain. Views of labor availability and costs gathered more mentions from these same period last year.
The latest U.S. Labor Department Producer Price Index (PPI) data, which reflects the prices paid to suppliers increased 11.3 percent on an annual basis in June, reportedly rising principally on energy cost increases. The June 2022 reading reflected the seventh consecutive month of double-digit price gains and were interpreted to indicate that inbound costs continue to rise at a highly elevated rate.
Global Supply Chain and Manufacturing Activity
The J.P. Morgan Global Manufacturing PMI® report, a composite index produced by J.P. Morgan and S&P Global, tracked sideways during the last three months of 2021, with a reported value of 54.2 for the month of December 2021. As noted in our Supply Chain Matters commentary in June and Q2 data, this same index value at the end of June fell to an 18-month low of 52.2, two percentage points since the end of 2021.
While the June report pointed to a recovery of Covid-19 lockdowns across major manufacturing areas of China during Q2, underlying global-wide weaknesses and headwinds were noted. Headwinds were reported as tapering growth in new orders, lowered business confidence, elevated inflation and continued stretched global supply chains. The global product demand picture was expressed as relatively weak and the end of Q2.
Such indications are increasing being interpreted by various economists to indicate that the consumer goods demand boom that fueled the post pandemic recovery could be shifting amid higher prices and inflation levels.
Business sentiment among various regional PMI reporting among developed and emerging regions further pointed to eroding confidence in business conditions for the upcoming second half of 2022.
U.S. production activity in June reportedly grew at the slowest pace in two years while Eurozone manufacturing output fell for the first time since the height of the initial Covid lockdowns in 2020. Eurozone business confidence reportedly slid to a 25-month low amid the Ukraine conflict and elevated inflation rates. Inflation rates across the EU were reported as 8.6 percent in June.
We noted in our published commentary that upon reviewing a grouping of developed regions, namely the United States, Eurozone, Japan and Taiwan, production and supply chain activity levels declined 2.9 percentage points from Q1 to Q2. Whereas, among a grouping of developing regions consisting of China, India, Indonesia, Mexico, Vietnam and Thailand, production and supply chain activity levels declined 2.4 percentage points in the same Q1 to Q2 period.
Summary Thoughts
At the start of this year, we had characterized various economic, financial, and manufacturing outlooks for 2022 reflecting a year of uncertainty brought about by supply chain disruptions and supply shocks.
A snapshot of the same data and indices at the mid-year mark would indicate that downside risks are now far more evident, and that in addition to economic, cost inflation and pandemic related impacts, geopolitical risks linked to existing global supply network sourcing are beginning to take center stage for strategic and tactical industry supply chain planning.
The second half of this year is likely to be even more challenging for industry supply chain leaders and their teams, and the needs for scenario and added contingency planning is an obvious requirement as is continual education of integrated business planning and C-Suite teams as to industry supply chain conditions on a regular basis.
In a subsequent commentary, we will revisit our 2022 prediction indicating that restoring more direct control in strategic and tactical direct materials sourcing will be a driving force for businesses in 2022.
Stay tuned
Bob Ferrari
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